Consumer Sentiment crashes, highest inflation expectations in 30 years... stocks tumble

What I’m referring to is buying an index ETF or a mutual fund. When you go to sell you only have one option; sell a portion and realize cap gains. Whereas investing in a diversified portfolio with a low tracking error to the S&P for instance (any index can be done); when you need funds you can offset the taxes somewhat or even negate them by selling positions at a loss. Continually loss harvesting even when you don’t need funds allows you to “bank” losses for future sells.

It is obviously more warranted for HNW investors where taxes are a real impact.

 

Kind of like Direct Indexing?

 

Yes. Goldman has a product. Also Natixis is one I’ve used a good bit of with great results.

 

If you are ok getting the index returns then you pay 30-35 bps for the direct indexing and harvest losses. The savings that I’ve seen clients experience almost appear fake.

 

Hmmm, all my mutual funds are in 401Ks so I haven’t had to worry about this.

 

True. If you have all your funds in qualified accounts then this isn’t an issue for you.

 

I assume you are referring to tax loss harvesting. While it is real, most of the time it is a timing difference. If you stay in the same tax bracket your whole life sooner or later you will pay the tax. If you fall to a lower bracket there can be a benefit, or if you hold it until you die you can get a step and basis and avoid the capital gains.

There is also a marginal benefit in the 3000 of capital losses can offset ordinary income each year.

As for direct indexing seems like a lot of mess for a long term modest benefit. At some point presumably you want to unwind and now you have 50 different positions to unwind. I’m not sure what the tax reporting of all this looks like.

 

Have a client for instance with a mid 7 figures taxable account. Unrealized gains of approximately 4MM (mix of long and short term). Moves into direct indexing and the tracking error for the S&P is less than 1%. They realized 400k in losses in the first month. Client owns a large business that will eventually sell; likely for a cap gain in the tens of millions. Game plan is to harvest losses for years and let them roll to offset as much of the business sale as possible.

Also, with regard to step up, many of these clients have dynasty trusts that don’t get step up in basis at death.

 

If the moved (sold) their holdings and then bought a direct indexing fund, weren’t there capital gains on what they sold? Otherwise where did $400k of realized losses come from?

How can he use the losses to offset the business losses? Won’t they be needed to offset the future gains on the portfolio?

 

With direct indexing, at least Natixis that I’ve used, they are able to get the portfolio to a tracking error of under 1% by just selling the losses in the portfolio and waiting on the gains as they quarterly rebalance. In this case since the client had 4MM in gains (if we sold the entire existing portfolio) he did have some losses in certain positions and in certain tax lots.

On your second point it wouldn’t be used to offset business income. We would bank the losses over time to offset his cap gains when he sells the business. His basis in the business is near zero.

 

More bad news on the economy. Instability from Trump and bad plans for the economy is not helping but instead, hurting.



WASHINGTON -- U.S. consumer confidence plummeted in February, the biggest monthly decline in more than four years, a business research group said Tuesday, with inflation seemingly stuck and a trade war under President Donald Trump seen by a growing number of Americans as inevitable.

The Conference Board reported that its consumer confidence index sank this month to 98.3 from 105.3 in January. That's far below the expectations of economists, who projected a reading of 103, according to a survey by FactSet.

The seven-point drop was the biggest month-to-month decline since August of 2021.

Markets on Wall Street immediately drooped. The S&P 500 fell 0.7%, while the Dow Jones Industrial Average slid 1.7%. The Nasdaq declined 1.4%.

 

We can have a recession if we want it!

 

"When you wish upon a star" ...
Recession is never very far.

 

Trump and Elon really reading the room wrong..

He won on improving the economy and immigration, but has outsourced policy to Elon’s fever dreams..

 

most financial platforms will run tax harvesting for you for a small fee

 

are you talking the 2% number?

 

I’m not familiar with this concept of “losses”, all my investment picks are gains!

j/k

My strategy if I have a loss is to offset it against a greater capital gain. Why? Because I don’t even want to deal with the paperwork or tracking of carry forward capital losses (esp long term)! I avoid that at all costs. I don’t do individual stock trades all that often, and only really had a handful of notable losses to carry, so I’ve only had to ponder this a few times.

If it’s being done with short term trades and high frequency not sure I understand it. Sounds like a bit of irrationally the tax code is causing and the financial engineers are running with it to create dubious, albeit presumably legal “products”. Instead of this “tax harvesting” bs, short term trades should be treated more like gambling losses (for short term, you will deduct or carryforward…nothing). There, I just made things more efficient and saved everyone a bunch of wasted energy trying to game the system.

 

2% appearing fake? No what I am referring to specifically is a client that had an existing portfolio with 2MM in unrealized gains. Moved the portfolio into direct indexing and they realized 250k in losses and kept the portfolio to a 1% tracking error to the S&P. Over time the tracking error will tighten and the client isn’t stuck in several positions with huge cap gains.

 

The fact that you can only use 3k in excess losses is ridiculous. It’s been that level for decades. Should raise that amount to 15-20k and that will limit the need to carry forward for a lot of people.

 

They are what they are. A drunken tailgate shouting at opposing fans as they walk by.

Find a better metaphor!